Term 'national debt' misleads country's finances

On May 16th the U.S. Treasury Department announced that the debt limit had been reached. Through accounting manipulations the federal government says it can manage to remain under that limit until early August. But what exactly is the national debt that is subject to this limit?

The statutory debt limit is a legal upper bound on the amount of debt the U.S. government can issue through the Department of the Treasury. The actual amount of debt issued is often referred to as the "public debt" or the "national debt." The former term is more accurate because this debt does not include amounts owed by private individuals or firms. Nonetheless, both terms are misleading.

So how much debt does the U.S. government owe? The Treasury Bulletin reports that the outstanding U.S. debt as Sept. 30, 2010 was $13,562 billion.

The national debt is held by a variety of individuals and institutions, and some of them really shouldn't count a part of the debt. For example, $5,656 billion was owed by one branch of the federal government to another. The U.S. Federal Reserve System is included in this category because, while it is legally independent of the U.S. government, it must refund its earnings on the U.S. securities it holds to the Treasury. Subtracting this sum leaves a remaining balance that was privately held of $8,369 billion; still a substantial number, but it's more than a third smaller than the original. It is not appropriate to think of the full amount as the debt of the nation. For one thing much of it is money owed by U.S. citizens to U.S. citizens. Just as I would not count $100 that I owe to my wife as part of our overall family debt, we should not count money owed by the government to its citizens as part of the overall national debt. It is in this sense that the term "national debt" is misleading.

Still that leaves more than four billion dollars that the U.S. government owes to foreigners. And if we include the net amount that private individuals and firms owe to foreigners, the total is likely even greater. The national debt is only weakly related to the net amount of money we as residents of the U.S. collectively owe to foreigners.